Present Law

Clinton Budget

Senate

BBA

7, Employer-provided
educational assistance

An employee's gross income
” and wages do not include
amounts paid or incurred by
the employer for educational
assistance provided to the
employee if such amounts
were paid or incurred
pursuant to an educational
assistance program that
meets certain requirements.
This exclusion is limited to
$5,250 of educational
assistance with respect to an
individual during a calendar
year. The exclusion applies
whether or not the education
was job related. In the
absence of this exclusion,
educational assistance is
excludable from income
only if it is related to an
employee's current job. The
exclusion expires with
respect to courses beginning
after June 30, 1997 and is
not available for graduate
level courses beginning after
June 30, 1996,

The exclusion for employer-
provided educational assistance
is extended for taxable years
beginning after December 31,
1996, and before January 1,
2001. The provision limiting
the exclusion to undergraduate
education would be
retroactively repealed. The
repeal is effective for graduate
level courses beginning after
June 30, 1996.

Effective date --Taxable years
beginning after December 31,
1996, and before January 1,
2001, and the repeal of the
restriction of the exclusion to
undergraduate education is
effective for graduate level
courses beginning after June 30,
1996.

The exclusion for employer-
provided educational assistance
is made permanent, effective for
taxable years beginning after
December 31, 1996. The
provision limiting the exclusion
to undergraduate courses would
be retroactively repealed. The
repeal would be effective for
graduate level courses
beginning after June 30, 1996.

Effective date.--Taxable years
beginning after December 31,
1996. The repeal of the
restriction of the exclusion to
undergraduate education is
effective for graduate level
courses beginning after June 30,
1996.

The exclusion for employer-
provided educational assistance
would have been extended for
taxable years beginning after
December 31, 1994 and before
January 1, 1997 and would not
have been available for graduate
level courses beginning after
December 31, 1996.

Effective date.--Taxable years
beginning after December 31,
1994, and before January 1,
1997. The exclusion for
graduate level courses would
have expired after December 31
1996.


Present Law

President's FY 1998 Budget

Senate Bill (Title II of S. 1)

BBA of 1995

taxpayer's spouse, or a
dependent. The student must
pursue a course of study on at
least a half-time basis. The
student must not have been
convicted of a Federal or State
felony drug offense. To be
eligible for the credit for a
second taxable year, the student
must obtain a GPA of 2.75 ona
4-point scale (or similar
measure) for all previous post-
secondary education.

Phase-out of credit--The
maximum credit amount would

be phased out for taxpayers with
modified AGI between $50,000
and $70,000 ($80,000 and
$100,000 for joint returns).
Beginning in 2001, the income
phase-out ranges would be
indexed for inflation.

No double dipping with respect
to any one student--If a taxpayer
claims a credit with respect to a
particular student, then the
proposed above-the-line
deduction (described below)
would not be available with



Present Law

President’s FY 1998 Budget

Senate Bill (Title IM of S. 1)

BBA of 1995

of a broad class of
employers (sec. 108(f)).

Student loans eligible for the
section 108(f) exclusion
must be made to assist an
individual in attending
(including room and board
expenses) an educational
institution that has a regular
faculty, student body, and
campus. The loan must be
made by (1) the United
States, (2) a State, (3)
certain tax-exempt public
benefit corporations that
control a State, county, or
municipal hospital and
whose employees are
deemed to be public
employees under State law,
or (4) an educational
organization that originally
received the funds from
which the loan was made
from the United States, a
State, or a tax-exempt public
benefit corporation. Student
loans made with private,
nongovernmental funds do
not qualify for the section

refinance outstanding student
loans and the student in not
employed by the lender
organization. As under present
law, forgiveness of the loan
must be contingent on the
student working for a certain
period of time in certain
professions for any of a broad
class of employers,

The section 108(f) exclusion
also would be expanded to
cover forgiveness of direct
student loans made through the
William D. Ford Federal Direct
Loan Program where loan
repayment and forgiveness are
contingent on the borrower's
income level.

Effective date.--Student loan
discharges after the date of
enactment.



Present Law

President’s FY 1998 Budget

Senate Bill (Title II of S. 1)

BBA of 1995

2. Deduction for
education expenses

In general, education
expenses are deductible only
as a trade or business
expense under section 162,
but only if the education (1)
maintains or improves a

skill required for the
taxpayer's current
profession, or (2) meets the
express requirements of the
taxpayer's employer or
requirements of law.
Education expenses are not
deductible if they relate to
certain minimum
educational requirements or
to training that enables a
taxpayer to begin working in
a new trade or business. In
the case of an employee,
education expenses (if not
reimbursed by the
employer) may be claimed
as an itemized deduction
only if such expenses relate
to the employee's current job
and only to the extent that
the expenses, along with

Education and job training
tax deduction

Maximum deduction per
taxpayer return--Individual

taxpayers would be allowed an
above-the-line deduction for
post-secondary tuition and
required fees (but not room and
board) up to $5,000 per taxpayer
return for 1997 and 1998. After
1998, the maximum deduction
would be $10,000 per taxpayer
return. The maximum
deduction would not vary with
the number of students in a
taxpayer's family. There would
be no limit on the number of
years for which the deduction
could be claimed with respect to
a particular student. The
deduction would be available in
the taxable year the expenses
are paid, provided that the
education commences or
continues during that year or
during the first three months of
the next year.

Eligible students--The education
expenses must be incurred on

Deduction for student loan
interest

Maximum deduction per
taxpayer return--Individual

taxpayers would be allowed an
above-the-line deduction up to
$2,500 per year for interest paid
on certain student loans used to
pay post-secondary education
expenses, including room and
board expenses. The deduction
would be allowed only with
respect to interest paid ona
student loan during the first 60
months in which interest
payments are required (not
counting months during which
the loan is in deferral). The
maximum deduction would not
vary with the number of
students in a taxpayer's family.
The education expenses must be
incurred within a reasonable
period before or after the
indebtedness is incurred.

Eligible students--The
indebtedness must have been

incurred to pay for education
expenses of the taxpayer, the

Deduction for student loan
interest

Same as Senate provision,
except that the indebtedness
must be incurred to pay for
education expenses of the
taxpayer or the taxpayer's
spouse (and not a dependent).

Effective date --Payments of
student loan interest due after
December 31, 1995.


Present Law

President’s FY 1998 Budget

Senate Bill (Title III of S. 1)

BBA of 1995

respect to that student for that
taxable year, although the
proposed deduction may be
available with respect to other
students for that same year.
Qualified expenses would
include only out-of-pocket
expenses and not expenses
covered by educational
assistance that is not required to
be included in the gross income
of either the student or the
taxpayer claiming the credit
(such as amounts excluded
under present-law secs. 117 or
135). Qualified expenses would
include education expenses paid
with amounts that constitute a
gift under section 102(a).

Effective date.--Payments made
on or after January 1, 1997, for
education commencing on or
after July 1, 1997.



Present Law

President’s FY 1998 Budget

Senate Bill (Title 11 of S. 1)

BBA of 1995

3. Forgiveness of student
loans

In the case of an individual,
gross income does not
include any amount from the
forgiveness of certain
student loans, provided that
the forgiveness is contingent
on the student working for a
certain period of time in
certain professions for any

Expansion of present-law
section 108(f)

Section 108(f) would be
expanded to include forgiveness
of loans made by tax-exempt
charitable organizations (e.g,
colleges or private foundations)
if the proceeds of such loans are
used to pay costs of attendance
(including room and board) at
an educational institution or to

excluded under present-law
secs. 117 or 135).

Information reporting--Any
person in a trade or business or

any governmental agency that
receives $600 or more in
education loan interest from an
individual during a year would
be required to provide an
information report on such
interest to the IRS and to the

payor.

Effective date.--Payments of

student loan interest due after
December 31, 1996,

No provision.

No provision.


COMPARISON OF CERTAIN PROPOSED TAX INCENTIVES FOR HIGHER EDUCATION

Scheduled for a Hearing
Before the
HOUSE COMMITTEE ON WAYS AND MEANS

on March 5, 1997

Prepared by the Staff
of the

JOINT COMMITTEE ON TAXATION

March 4, 1997

ICX-9-97



Present Law

President’s FY 1998 Budget

Senate Bill (Title II of S. 1)

BBA of 1995

returns). Individuals are
permitted to make
nondeductible contributions
(up to $2,000 per year) to an
IRA to the extent the
individual is not permitted

to (or does not) make
deductible contributions.

5. Qualified State tuition
programs

Section 529 provides tax-
exempt status to certain
qualified State tuition
programs, under which
persons may purchase
tuition credits on behalf of a
designated beneficiary or
make contributions to an
account established for the
purpose of meeting future
tuition and required fees
(but not room and board
expenses) of a designated
beneficiary at a post-
secondary educational
institution. Amounts
contributed to a qualified
State tuition program are not

No provision.

Contributions made prior to
April 15th may be treated as
made during the preceding
taxable year.

Effective date.--Taxable years
beginning after December 31,
1996.

Tax-free withdrawals from
qualified State tuition
programs

Distributions made by a
qualified State tuition program
to (or on behalf of) a designated
beneficiary to cover qualified
higher education expenses at a
post-secondary educational
institution would not be
included in the gross income of
the beneficiary (or any
contributor to the program).

The term "qualified higher
education expenses" would be
expanded to include not only
tuition and required fees but all
costs of attendance as defined in
section 472 of the Higher

Contributions made prior to
April 15th may be treated as
made during the preceding
taxable year.

Effective date.--Taxable years

beginning after December 31,
1995,

No provision.


Present Law

President's FY 1998 Budget

Senate Bill (Title 11 of S. 1)

BBA of 1995

108(f) exclusion.

4. Education investment
accounts

Present law generally does
not provide special tax
treatment for investment
accounts established to meet
educational expenses

Individuals may make
deductible contributions to
an IRA for each taxable year
up to the lesser of $2,000 or
the amount of the
individual's compensation
for the year if the individual
is not an active participant

in an employer-sponsored
qualified retirement plan
(and, if married, the
individual's spouse also is
not an active participant). If
the individual (or spouse) is
an active participant, the
$2,000 limit is phased out
between $25,000 and
$35,000 of AGI ($40,000
and $50,000 of AGI for joint

No provision

“Bob Dole education
investment accounts”

Individual taxpayers would be
allowed to make nondeductible
annual contributions up to
$1,000 into a "Bob Dole
education investment account"
on behalf of a child under the
age of 18. Distributions from
such an account would be
excluded from gross income if
used to pay for post-secondary
education expenses of the
beneficiary (including room and
board expenses). To the extent
that a distribution is not used for
such education expenses, the
earnings portion of the
distribution would be included
in gross income (and the
distribution also would be
subject to a 10-percent penalty
tax, unless the distribution was
made on account of death or
disability of, or a scholarship
received by, the beneficiary of
the account).

“American Dream Savings
Accounts”

Individual taxpayers would be
permitted to make
nondeductible contributions to
American Dream Savings
Accounts (ADSAs) to the extent
that they do not make deductible
contributions to a IRA. Tax-
free distributions (if a five-year
holding period is satisfied)
would be allowed for
withdrawals from ADSAs to
pay for tuition and required fees
for the attendance at a post-
secondary institution of the
individual, a spouse, child,
grandchild, or any other
ancestor (or any child,
grandchild, or other ancestor of
the spouse), as well as
withdrawals for certain first-
time homebuyer expenses and
medical expenses. Special
purpose withdrawals also would
not be subject to the 10-percent
early withdrawal penalty tax.



Present Law

President’s FY 1998 Budget

Senate Bill (Title III of S. 1)

BBA of 1995

other miscellaneous

deductions, exceed two

percent of the taxpayer's
_ AGI.

Student loan interest
generally is treated as
personal interest and thus is
not allowed as an itemized
deduction from income.

behalf of the taxpayer, the
taxpayer's spouse, or a
dependent. The student must
(1) pursue a course of study on
at least a half-time basis, or (2)
take a course to improve or
acquire job skills. The student
may have already completed an
unlimited number of years of
post-secondary education.
There is no minimum GPA
requirement, nor is there a
requirement that the student be
free of felony drug convictions.

Phase-out of deduction--Same
as proposed HOPE scholarship
tuition tax credit (described
above).

No double dipping with respect
to any one student--Same as
proposed HOPE scholarship
tuition tax credit (described
above).

Effective date.--Same as
proposed HOPE scholarship
tuition tax credit (described
above).

taxpayer's spouse, or a
dependent at the time the
indebtedness was incurred. The
student must be at least a half-
time student when the
indebtedness was incurred.
There is no minimum GPA
requirement, nor is there a
requirement that the student be
free of felony drug convictions.

Phase-out of deduction--The
maximum deduction would be
phased out for taxpayers with
modified AGI between $45,000
and $65,000 ($65,000 and
$85,000 for joint returns).
Beginning in 1998, the income
phase-out ranges would be
indexed for inflation.

Reduction of qualified

education expenses--Education
expenses would include only

out-of-pocket expenses and not
expenses covered by
educational assistance that is not
required to be included in the
gross income of the student or
the taxpayer claiming the
deduction (such as amounts



COMPARISON OF CERTAIN PROPOSED TAX INCENTIVES FOR HIGHER EDUCATION

Present Law

President’s FY 1998 Budget

Senate Bill (Title III of S. 1)

BBA of 1995

|. Tuition tax credit

There is no tax credit under
present law for tuition
expenses. Special rules
provide an exclusion from
gross income for certain
student loan discharges (sec.
108(f)), qualified
scholarships (sec. 117), and
certain employer-provided
educational assistance (sec.
127); and an exclusion from
gross income also is
provided to low- and
middle-income taxpayers for
interest earned on U.S.
savings bonds used to pay
post-secondary tuition and
required fees (sec. 135).

HOPE scholarship tuition tax
credit

Maximum credit per student--
Individual taxpayers would be
allowed to claim a
nonrefundable tax credit up to
$1,500 per student per year for
tuition and required fees (but
not room and board) for the first
two years of the student's post-
secondary education in a degree
or certificate program. The
maximum credit amount would
be reduced by any Federal
educational grants, such as Pell
grants, awarded to the student
for the year. Beginning in 1998,
the $1,500 maximum credit
amount would be indexed for
inflation. The credit would be
available in the taxable year the
expenses are paid, provided that
the education commences or
continues during that year or
during the first three months of
the next year.

Eligible students--The education
expenses must be incurred on
behalf of the taxpayer, the

No provision.

No provision.


Present Law

Clinton Budget

Senate

BBA

8. Small business tax
credit for employer-
provided educational
assistance

An employer may deduct
certain job-related training
and education expenses, as
well as amounts paid or
incurred for educational
assistance provided to
employees pursuant to an
educational assistance
program that meets certain
requirements. Employer
payments for job-related
training and amounts paid
under a qualified
educational assistance
program up to $5,250
annually are excluded from
the gross income and wages
of the employee. The
exclusion for employer-
provided educational
assistance expires after June
30, 1997.

The proposal would provide a
temporary 10-percent income
tax credit for small businesses
with respect to expenses
incurred for education of
employees by third parties under
a qualified employer-provided
educational assistance program.
The credit would be available to
employers {including self-
employed individuals) where
the business has average annual
gross receipts of $10 million or
less for the prior three years.

Effective date --The proposal
would be effective for payments
made in taxable years beginning
after December 31, 1997, and
before January 1, 2001 with
respect to expenses incurred
during those years.

No provision.

No provision.



INTRODUCTION

The House Committee on Ways and Means has scheduled a public hearing on March 5, 1997, on the education and training tax
provisions of the President’s fiscal year 1998 budget proposal. This document,’ prepared by the staff of the Joint Committee on
Taxation, summarizes present law and certain tax proposals for education and training contained in (1) the President’s fiscal year 1998
budget, (2) Title II (“Affordable College Act”) of S. | (“Safe and Affordable Schools Act of 1997"), introduced on January 21, 1997,
and (3) the Balanced Budget Act of 1995 (“BBA of 1995") (H.R. 2491) (which was vetoed by President Clinton). A more detailed
description of present law and the education and training proposals contained in the President’s fiscal 1998 budget and in Title II of
S. 1 is included in a separate staff pamphlet.”

' This document may be cited as follows: Joint Committee on Taxation, Comparison of Certain Proposed Tax Incentives for
Higher Education (\CX-9-97), March 4, 1997.

? See Joint Committee on Taxation, Analysis of Proposed Tax Incentives for Higher Education (JCS-3-97), March 4, 1997.

1



CONTENTS

Page
INTRODUCTION 2.0. ccc eee tebe ener bree bebe bbb bbb bobby bbb b peepee. 1
COMPARISON OF CERTAIN PROPOSED TAX INCENTIVES FOR HIGHER EDUCATION ................0-0-0-0 2. 2

OCIAAMAWN —

. Tuition tax credit
. Deduction for education expenses .
. Forgiveness of student loans .....
. Education investment accounts . . .
. Qualified State tuition programs
. Treatment of Federal work-study payments
. Employer-provided educational assistance ............ 12
. Small business tax credit for employer-provided educational assistance .. . .



Present Law Clinton Budget Senate BBA
deductible, but contributors Education Act of 1965, thus,
obtain the benefit of deferral including room and board
of tax on earnings until expenses.
educational benefits are
provided to a designated Effective date. --Taxable years
beneficiary (at which time beginning after December 31,
earnings used for 1996.
educational benefits are
includable in the gross
income of the student)
6. Treatment of Federal No provision. Exclusion of Federal work- No provision.

work-study payments

Gross income generally
includes compensation for
services. Gross income
does not include any amount
received as a qualified
scholarship, but section
117(c) specifically provides
that the exclusion for
qualified scholarships does
not apply to any amount
received by a student that
represents payment for
teaching, research, or other
services by the student.

study payments

Amounts received by an
individual for services
performed pursuant to a Federal
work-study program operated
under section 441 of the Higher
Education Act of 1965 would be
excluded from the gross income
of the individual.

Effective date.--Taxable years
beginning after December 31,
1996.